FINANCING FOR DEVELOPMENT: PROGRESS AND PROSPECTS
FINANCING FORDEVELOPMENT:PROGRESS ANDPROSPECTSRepo of the Inter-agency Task Forceon Financing for Development 2017United Nations
FINANCING FORDEVELOPMENT:PROGRESS ANDPROSPECTSReport of the Inter-agency Task Forceon Financing for Development 2017asdfUnited NationsNew York, 2017
United Nations publicationSales no. E.17.I.5ISBN 978-92-1-101363-4Copyright United Nations, 2017All rights reserved
Chapter I.The challenge of the global economicsituation1In 2016, the first full year of implementation ofthe 2030 Agenda for Sustainable Developmentand the Addis Ababa Action Agenda, the worldeconomy grew at its slowest rate since the 2008world financial and economic crisis. Improvementsare projected for 2017 and 2018, but remain insufficient to deliver the large increase in investmentneeded to achieve the Sustainable DevelopmentGoals (SDGs).Since the crisis, global growth has been sluggish, trade and investment growth have deceleratedand financial flows have remained volatile. The rapiddecline in poverty over the last several decades reliedon strong economic growth in developing countries,particularly in some large economies. The post-crisisgrowth trajectory in the context of current levels ofinequality will not deliver poverty eradication by2030, nor will current levels of mitigation investments suffice to keep global temperatures belowagreed levels.The success of the 2030 Agenda for Sustainable Development will rely on changing the current growth dynamic. International cooperationthat supports policies to increase public and privateinvestment in sustainable development and generate employment— while protecting the vulnerableagainst crises and shocks — would help achievethe SDGs and, at the same time, stimulate globalgrowth and reduce the risk of future crises, thus creating a virtuous cycle. Implementation of the Addis12Agenda, which provides a broad framework for suchcooperation, is therefore more important than ever.1.Inadequate growth of globaldemand and incomeThe United Nations Department of Economic andSocial Affairs (UN/DESA) estimates that worldgross product (WGP) expanded just 2.2 per centin 2016, based on market exchanges rates. This isbroadly in line with estimates by other Task Forcemembers. The International Monetary Fund (IMF)and the World Bank both describe global growth assubdued; the United Nations Conference on Tradeand Development (UNCTAD) characterizes theglobal economy as fragile; and UN/DESA notesthat in 2016 the world economy had not yet emergedfrom the post-crisis period of slow economic growth,which is associated with weak growth of investment,trade and productivity. Nonetheless, some improvement in growth is forecast for 2017 and 2018, withUN/DESA projecting growth of 2.7 per cent in 2017and 2.9 per cent in 2018.2There is, however, a wide dispersion of possible outcomes around these projections, due touncertainties over policy stances of major countries,potential impacts of unconventional monetary policies, capital flow reversals from developing countries,and geopolitical factors. While the balance of risksis on the downside, there are also upside factorsto near-term growth. In particular, global activityThis chapter draws from the following documents: United Nations (2017) World Economic Situation and Prospects2017, IMF (2016) World Economic Outlook, IMF (2017) World Economic Outlook Update, UNCTAD (2016) Tradeand Development Report, and World Bank (2017) Global Economic Prospects.See United Nations (2017); this is broadly in line with International Monetary Funds (IMF) estimates and projections. The IMF projects growth of 3.4 and 3.6 per cent respectively in 2017 and 2018, up from 3.1 per cent in2016. The differences are due to exchange rate adjustments: IMF projections are based on purchasing power parityexchange rates, which give a greater weight to fast-growing developing economies.
6Financing for Development: Progress and Prospectscould accelerate if policy stimulus turns out to belarger than projected in some countries.2.InvestmentWeak investment has been central to the prolongedsluggishness in the global economy, through its linkages with aggregate demand, international trade,productivity and capital flows. Figure 1 shows thatthe levels of expenditure growth prior to the crisis—including, for example, debt-financed consumptionby households in developed countries—could notbe sustained. Deleveraging by banks will make itdifficult to return to high levels of consumption inthe near term. At the same time, the contribution ofinvestment to global economic growth has declinedfrom an average of 1.4 percentage points per annumduring 2003-2007 to 0.7 percentage points perannum since 2012 (figure 1).In developed economies, private non-residentialinvestment growth has been exceptionally weak inrecent years. Data shows that most major developedeconomies experienced a contraction in privatenon-residential investment in the first half of 2016.Despite some recovery in recent quarters, the publicinvestment-to-gross-domestic-product (GDP) ratioalso remains low in many developed economies.This reflects a continuation of fiscal adjustment policies adopted by Governments since 2010, following abounce back in growth due to the coordinated monetary easing and temporary fiscal stimulus agreed bythe Group of 20. The reluctance to increase publicsector investment arose despite record-low and oftennegative government bond yields.Investment growth also slowed in developingcountries, largely owing to weak private investment,particularly in commodity sectors. In the case ofChina, weak investment growth reflects overcapacityin some industrial sectors, sluggish market demand,and higher corporate financing costs. In some developing countries, such as in East and South Asia andin some of the smaller economies in South-EasternEurope and Central America, public investmentgrowth picked up pace, which partially compensated for the deceleration in the growth of privateinvestment.The broad-based weakening of investment-toGDP ratios can be attributed to a variety of globaland country-specific factors. Protracted weakFigure 1Contributions to world gross product growth, 2003 –2018 (Percentage)5.04.03.02.01.00.0-1.0-2.0-3.02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Contribution of non-investment expenditure components to world gross product growthContribution of investment to world gross product growthWorld gross product growthSource: UN/DESA based on United Nations Statistics Division National Accounts Main Aggregates Database and UN/DESAforecasts.Note: Data for 2016 are partially estimated; data for 2017–2018 are forecasts.
The challenge of the global economic situationglobal demand has discouraged firms from investing — especially in export-oriented and commoditysectors once the period of high commodity pricesended. This has led to delays and cancellations ofinfrastructure investment and exploration activities.As a result, global energy investment declined by 8per cent in 2015.3Capital flows, especially to developing countries,reflect the weakening of investment. Cross-borderbank loans to developing countries have been particularly volatile, as international banks have continued to deleverage. Portfolio investment (purchaseof securities) has also been highly volatile; the netoutflow was 413 billion in 2015 and 218 billionin 2016. Foreign direct investment, which tends tobe more stable and longer term than the other typesof cross-border private finance, fell to an estimated 209 billion in 2016 from 431 billion in 2015.Other elements at play include long-term factors such as demographics and expectations of lowerfuture productivity growth, and the weakening ofthe “profit-investment nexus” as reflected in thedivergence of corporate profit growth and capitalexpenditure growth.4 Across developed economiesand increasingly in developing economies, the conventional corporate practice of reinvesting retainedprofits in production has been progressively replacedby strategies focused on meeting short-term earningstargets, especially for publicly listed firms. There isevidence5 that the focus on short-term profitabilityhorizons often comes at the expense of long-termoriented, productive and sustainable investment.The slowdown in private investment growthalso raises some concerns over corporate debt, particularly in many developing economies, as it suggests that the significant increase in corporate debtburdens in emerging market economies has failedto translate into a commensurate increase in pro345677ductive capital stock. Indeed, disaggregated sectoraldata shows that 75 per cent of the increases in developing countries’ corporate debt during 2010-2014can be attributed to very few sectors, including oiland gas, electricity, and construction and materials,that are not at the technological frontier and do nothave the greatest potential to contribute to overallproductivity growth. As high debt burdens continueto accumulate, it could begin to restrain access tofinance or prompt firms to deleverage and perpetuate the deceleration in investment growth.3.International trade and tradepolicyAfter a robust rebound from the global economicand financial crisis, international trade grew at asluggish pace from 2011 to 2014—less than 2 percent per year in value terms—before declining by 10per cent in 2015.6 Nominal factors such as the fall incommodity prices and the overall appreciation of theUS dollar may have triggered the trade contractionin 2015. However, the contraction occurred not onlyin the commodity sector, where the fall was the largest, but also in the manufacturing, agricultural andservices sectors. Moreover, it affected all geographicregions, including developing countries. A slowingdown of the expansion of global value chains (GVC),which triggered weak import demand in emergingeconomies in East Asia, also played a role.The downward trade trends appear to havecontinued into 2016. In September 2016, the WorldTrade Organization downgraded its forecasts fortrade volume growth in 2016 from 2.8 per cent to1.7 per cent. In February 2017, the World Bank 7reported that world trade performance in 2016 wasthe weakest since the aftermath of the 2008 worldfinancial and economic crisis, with overall growth ofthe volume of world trade almost stagnating.IEA (2016). World Energy Investment 2016.UNCTAD (2016). Trade and Development Report (TDR), 2016, Chapter V.See for example, for the case of the United States, Sampson, Rachelle C. and Shi, Yuan (2016). Evidence and Implications of Short-Termism in US Public Capital Markets: 1980-2013. Available from: http://dx.doi.org/10.2139/ssrn.2837524WTO (2106). World Trade Statistical Review. At publication of this report, the most recent year with comprehensivetrade data is 2015.World Bank (2017). Trade developments in 2016: Policy uncertainty weighs on world trade. Available from: obalTrade-Watch-Report-Web.pdf.
8Financing for Development: Progress and ProspectsThe slowdown can be traced in part to theweakness in global economic activity and the slowdown in investment growth, especially in capital goods, which appears to have restrained tradegrowth since 2012. The IMF estimated that, for theworld as a whole, up to three-fourths of the slowdown in the growth in the volume of goods importsbetween 2003-2007 and 2012-2015 was due toweaker economic activity, most notably subduedinvestment growth.8 At the same time, weak tradeis propagating and reinforcing the investment slump,particularly in export-oriented sectors. In otherwords, tepid international trade growth is both asymptom of and a contributing factor to low investment and the global economic slowdown.Services trade, in contrast, has been more resilient than trade in goods, a trend that has prevailedsince the global financial crisis. Services exportsfrom developing and transition countries grew fasterthan those of developed countries in almost everymajor sector during 2005-2015, including financialservices, telecommunication, and computer andinformation services. Nevertheless, global tradein services remains barely one-fourth as large astrade in goods.While it is unclear whether the current tradestagnation is temporary or reflects a “new normal”,world trade growth is not likely to significantly outpace the growth of the world economy in at least thenext several years. At the same time, the impact oftrade on national economies and employment hasbecome a central issue in the public discourse in anumber of developed countries. Thus, although theAddis Agenda called for the promotion of a universal,rules-based, open, non-discriminatory and equitable multilateral trading system, there is a risk thatdomestic politics in some countries could take tradepolicy in a different direction.4. Impacts on sustainabledevelopment prospectsWeak investment and trade have played a significantrole in the decline of labour productivity growthsince the 2008 crisis. In developed countries, the8910slowdown in productivity growth has been drivenby the lacklustre rate of capital deepening. In fact,since 2011 some of the largest developed economieshave experienced a period during which the volumeof productive capital stock per hour of labour inputhas actually declined, reflecting the aforementionedlow private and public investment growth.The current deceleration of capital deepeningcould also lead to weaker total factor productivitygrowth over the medium-term, as the rate of innovation, labour force skills and the quality of infrastructure could all be negatively affected. This wouldin turn hamper technological change and efficiencygains that underpin total factor productivity growth.As it becomes more difficult for economies to specialize in production for which they have comparativeadvantage, the anaemic global trade environmentalso contributes to slow productivity growth.Lacklustre investment in low-carbon sectorsalso impedes carbon productivity growth. Achieving the SDGs will require both inclusive growthand a rapid decarbonization of the global economy,thus producing an ever-increasing amount of GDPper unit of carbon emitted. There had been someencouraging news regarding investment in renewable energy, which grew more than six fold from 2004to 2011 (figure 2).9 In 2015, renewables accountedfor over 50 per cent of newly installed energy production capacity. 10 However, the absolute annualamount of such investment has not continued togrow measurably since 2011, meaning that it hasbeen falling as a share of world output. Thus, whilethe earlier increase in renewable investment hashelped hold back the growth of carbon emissions,strong and sustained further growth in investmentwill be needed to reach goals for mitigation of as wellas adaptation to climate change.5.Employment, inequality andsocial protectionThe social consequences of the economic growthtrend delineated here are profound. The International Labour Organization (ILO) estimates thatover 200 million people are expected to be unem-IMF (2016). World Economic Outlook, October 2016.The data exclude large hydroelectric projects.United Nations (2017), World Economic Situation and Prospects, 2017, p. 29.
The challenge of the global economic situation9Figure 2Global new investment in renewable energy, 2004 –2015 (Billions of United States dollars)300Developing economiesDeveloped 12201320142015Source: Frankfurt School-UNEP Centre/BNEF, Global Trends in Renewable Energy Investment 2016.ployed in 2017, 3.4 million more than in 2016, withfurther increases expected in 2018 as more andmore people come of age and join the global labourforce. 11 In addition, many jobs do not qualify as“decent work”. About 42 per cent of employed persons globally (over 1 billion people) are estimated towork in vulnerable occupations—that is, the workis precarious and the workers do not enjoy sufficientaccess to social protection schemes. Indeed, despitegrowth in these schemes, the World Bank estimatesthat almost 60 per cent of the population of thedeveloping world are served by no social protection system.12There is reason for concern about below-targeteconomic growth and its social impact in the leastdeveloped countries (LDCs) in particular. In theshort run, low growth “poses a risk to critical publicexpenditure on healthcare, education, social protection and climate change”.13 In the long run, thecurrent economic growth trajectory would leave theLDCs short by a large margin of the goal of eradicating extreme poverty by 2030 (figure 3).111213A model simulation exercise to assess themagnitude of investment needed to reach an average GDP growth rate of 7.0 per cent per annum inLDCs suggests that investment growth in LDCsas a whole would need to average 11.3 per cent perannum through 2030, an increase of roughly 3.0percentage points relative to baseline projections.While this exceeds the average rate of investmentgrowth of 8.9 per cent recorded between 2010 and2015, it is in line with the investment rate recordedduring the period of rapid growth of 2000-2005,when GDP growth in the LDCs as a whole averaged 6.8 per cent per annum. However, the externalenvironment is expected to be much less supportive to growth in the LDCs than it was at that time,when export growth for the group averaged 6.5 percent per annum.There is also reason for concern about reachingthe poverty eradication goal in developing countriesas a whole. Poverty reduction may be brought aboutthrough growth of the economy and by redistributivepolicies that bring more economic opportunities andincome to the poor. Most of the reduction in globalILO (2017), World Employment and Social Outlook: Trends 2017, Geneva.Fiszbein, Kanbur and Yemtsov (2013). Social Protection, Poverty and the post-2015 Agenda. Policy Research Working Paper 6469. World Bank.United Nations (2017). World Economic Situation and Prospects, 2017, p. 5.
10Financing for Development: Progress and Prospectspoverty thus far has taken place through the economicgrowth effect. However, UN/DESA estimates that ifthe slow growth trend continues and no new redistributive policies are implemented, about 6.5 per centof the world population will remain poor in 2030.14It is also notable that the ILO global indexof social unrest, which measures the expressed discontent with the socioeconomic situation in a givencountry, remains elevated. The ILO finds that, combined with the lack of decent job opportunities, thispresages a likely further increase in the number ofinternational migrants.156. From a vicious to virtuous cycleA more effective policy approach is needed to restorethe global economy to a healthy, inclusive and resilient growth trajectory over the medium term. TheAddis Agenda, which provides a comprehensiveframework for achieving sustainable development,speaks to the challenges laid out above.In the thematic chapter (chapter II), theInter-agency Task Force on Financing for Development focuses on two issues in particular: increasinginvestments in sustainable development and enhancing social protection. On the one hand, it is imperative to increase the global rate of investment—inparticular, sustainable medium- and long-term investment, including in infrastructure and combating climate change. Global savings are adequate to the task,but are not adequately focused on sustainable capitalformation. The Addis Agenda specifies a range ofpolicies at national and international levels aimed atincreasing investment. On the other hand, the AddisAgenda social compact, and in particular its socialprotection floor, point towards concrete interventionsthat can address extreme poverty. They also provideincome security to households and can thus smoothconsumption cycles and support aggregate demand.The following chapter elaborates some of the thinkingand proposals of the Task Force in this regard.Figure 3Extreme poverty headcount ratios in 2012 and projections for 2030, holding inequality constant ntriesAfricaEast AsiaSouth AsiaLatin America Least developedand the Carribbean countriesSource: UN/DESA.Note: * Forecast; see Holland and Jayadev (2016) for detailed discussion of the forecast models.16141516Ibid., pp. 25-27.ILO (2017), op. cit., p. 9.Holland, Dawn and Arjun Jayadev (2016). Linking inequality and poverty in macroeconomic models. Presentationat Project LINK Meeting 2016, Toronto, October. Available from http://www.rotman.utoronto.ca/ Kconferences/ LINK-2016-Agenda.
The challenge of the global economic situation. 1 1. is chapter draws from the following documents: United Nations (2017) Th. World Economic Situation and Prospects 2017, IMF (2016) World Economic Outlook, IMF (2017) World Economic Outlook Update, UNCTAD (2016) Trade and Development Report, and World
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